7. Inclusion of the Fringe benefit amount into Remuneration
The income value of the fringe benefit is calculated by using one of the two formulas described above.
The legislation provides that business travel expenses can be claimed by the employee against the income value at the end of the tax year by submitting a logbook and/or proof of paying the full amount towards the running costs of the company car (explained in a section that follows).
However, the payroll needs a remuneration value to be able to calculate PAYE.
Confirming the trend to align the travel allowance and company car provisions as closely as possible, a seemingly small but very significant change was made to both the company car and the travel allowance requirements for the 2011/12 year of assessment.
From 1 March 2011, the Fourth Schedule definition of remuneration gives the employer the option to include either 80% or 20% of the income value of the fringe benefit for the private use of a company car into remuneration as a provision towards the potential deduction of business travel expenses on assessment if the company car is used for business travel.
The ‘80%/20%’ provision is worded as follows:
“Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of the amount of such allowance or advance must be included”.
Inclusion rate of 80%
The default (and the ‘no risk’) option for the employer is to use the 80% inclusion rate.
However, if the 80% option is used for employees who travel ‘substantially’ for business purposes, the employee will be taxed on 80% of what is in the main employer’s business travel expense. This is unfair to the employee who must wait for about 6 months into the new tax year to get a refund of the tax owed to him.
In this case, the 20% inclusion rate can be applied if it the circumstances described in the ‘80%/20%’ provision above justify its application.
Inclusion rate of 20%
There is a risk to the employer (in terms of paragraph 5 of the Fourth Schedule) of applying the 20% option when it shouldn’t have been applied. If it turns out later that more than 20% of the travel was private travel and the employer should have applied the 80% inclusion rate, penalties, and interest on the untaxed 60% portion could be an unpleasant result.
The temptation to understate the remuneration value by incorrectly applying the 20% inclusion rate is increased by the fact that remuneration is not only used to calculate employees’ tax, but also for UIF contributions as well as for the skills development levy calculations, and at some stage in the future, the Compensation Fund’s annual Return of Earnings declaration as well.
To make an informed decision on which inclusion rate to use, the employer should check the private and the total kilometer values for a recent period of the year (the longer the period, the better). Calculate the private use percentage value by dividing the private kilometers by the total kilometers, and if the private ratio is less than 20%, then the 20% inclusion rate can be safely used.
The kilometer details and the calculation should be retained in case of a query by SARS.
Inclusion rate of 100%
Many employers (and employees) prefer to tax the fringe benefit in full in the payroll, knowing that a refund will be granted to the employee on assessment for any business travel expenses.
Some employees don’t want to bother with a logbook, or even if he does maintain a logbook, would prefer to get a refund on assessment rather than having to pay SARS at the end of the year.
Paragraph 2(2) of the Fourth Schedule provides that an employer may, at the written request of any employee, deduct or withhold additional amounts of employee tax from an employee’s remuneration.
This is known as ‘voluntary’ tax in the payroll world, and it is a very valuable option to be aware of.
Employees who want to avoid an assessment payment at the end of the year, can make use of this option to pay more PAYE during the year.
Alternatively, employees may request in writing that the employer includes 100% of the income value of the fringe benefit in their remuneration.
The SARS Interpretation Note # 72 confirms that if there is no business travel, then 100% of the income value can be included in remuneration for PAYE purposes as described above.
Note: This concession only applies to the company car fringe benefit, and not to travel allowances.
‘Average’ or ‘Retrospective’ calculations
The legislation provides for only two options –
1. 80% (the default or standard rate), or
2. 20% (the concession rate for employees who travel less than 20% for private purposes.
The employer is allowed to exercise his 80%/20% choice every month should the circumstances justify it. Normally the inclusion rate would not be changed so often, but two or three changes per year because of circumstances that change, are possible.
For example, a salesman on the road for the first 6 months of the year is promoted to sales manager for the last 6 months of the year and is then mostly desk-bound. While travelling extensively for business in the first 6 months, a rate of 20% was applied. After becoming more desk-bound for the last 6 months, 80% was (correctly) used.
The mathematical result of 20% for 6 months and 80% for 6 months is that over the full year, an average inclusion rate of 50% was effectively applied.
Remember the wording of the provision in the legislation that reads as follows: Provided that where the employer is satisfied that at least 80 per cent of the use of the motor vehicle for a year of assessment will be for business purposes, then only 20 per cent of such allowance or advance must be included.
This provision clearly states that either 80% or 20% must be applied for a year of assessment.
Applying the letter of the law as it stands would mean that the inclusion rate that is valid at the end of the tax year must be applied retrospectively back to the start of the tax year by the payroll.
However, a retrospective calculation will cause problems –
1. If the first portion of the year was taxed using 20%, and the remainder using 80%, it will mean that in the final tax year end calculation, tax on 80% for the period that was initially correctly taxed on 20% will be withheld in the last pay period of the year, resulting in cash flow problems for the employee.
2. If the first portion of the year was taxed using 80%, and the remainder using 20%, it will mean that in the final tax year end calculation, the extra tax for the initial period that was correctly calculated on 80% will be ‘illegally’ re-calculated using 20% in the final tax calculation, and the tax ‘given back’ to the employee.
This is an example of the law not contemplating the reality that employees’ tax is calculated during the tax year, and not in one big ‘grab’ at the end of the tax year.
Skills Development levy and UIF contributions
The Skills levy and the UIF contribution calculations are both based on Fourth Schedule remuneration.
The higher the remuneration value (i.e., 80% or 100%), the higher the cost to the employer of these statutory fees, limited only by the UIF threshold. These two statutory payments are a cost of employment for the employer, despite their social benefits.
If the numbers are large, lower employment costs might tempt employers to place themselves at risk by applying the 20% inclusion rate when the rate should be 80%.